The Unequal Impact of Inflation

Research we’ve published today shows that over the past year high inflation has hit the poorest much harder than the high earners.

A variety of factors both domestic (such as the hike in VAT) and global (a rising oil price following the Arab Spring) pushed inflation higher in 2011, but as different households spend a differing proportion of their income on different items, the impact of rising prices has been far from uniform.

This means that as the poorest 10% of households spent a much greater proportion of their income on items such as food and utility bills which were bigger drivers of inflation in 2011, they experienced inflation rates well above the published headline level.

As the graph above makes clear, since June 2011 the poorest decile of earners have been the hardest hit. By contrast in 2010 it was the higher earners who were most affected by rising prices.

Whereas the poorest 10% of households spent 43% of their income on household utility bills and food, the richest 10% spent just 20%.

It was been widely reported that the UK is going through a squeeze on living standards of historical proportions – the worst since the 1920s according to Sir Mervyn King – but what is less appreciated is how this has affected different family types.

Real wages have been falling for two years and are not expected by the OBR to start growing again until mid 2013. The fact that prices are rising faster than earnings has cost the median worker an annual £727 in real terms since January 2010 – 3.4% of their wages. And that’s before we take account of things such as changes to tax credits.

The Chancellor might like to say ‘we’re all in this together’ but the data is saying something quite different.

We’ll be updating these series throughout the year as the data becomes available.

Written by Duncan Weldon

Duncan Weldon was a Senior Policy Officer in the Economic and Social Affairs Department covering macroeconomics and regional policy. Before joining the TUC he had a fairly varied career taking in the Bank of England, fund management, the Labour Party…